Business Context and Reporting Period
Company: McKesson HBOC, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2001
Business Overview: The Company operates as the world's largest health care service and technology company through two primary segments: Health Care Supply Management (wholesale distribution of drugs, medical-surgical supplies, and health/beauty products) and Health Care Information Technology (software solutions, networking, and outsourcing services for health care organizations). The Supply Management segment accounted for approximately 98% of total revenues in fiscal 2001.
Key Financial Metrics
| Metric | Fiscal 2001 | Fiscal 2000 | Fiscal 1999 |
|---|---|---|---|
| Revenues | $42,010.0 million | $36,687.0 million | $29,970.9 million |
| Net Income (Loss) | $(48.3) million | $723.7 million | $84.9 million |
| Income from Continuing Ops | $(42.7) million | $184.6 million | $60.6 million |
| Diluted EPS (Total) | $(0.17) | $2.57 | $0.31 |
| Gross Profit Margin | 5.8% | 6.1% | 7.7% |
| Operating Profit | $370.0 million | $322.4 million | $310.0 million |
| Total Debt | $1,229.7 million | $1,260.0 million | $1,151.2 million |
| Cash & Cash Equivalents | $433.7 million | $548.9 million | $233.7 million |
| Working Capital | $2,614.3 million | $2,843.7 million | $1,708.0 million |
Note: Fiscal 2000 Net Income included a $515.9 million after-tax gain from the sale of the McKesson Water Products Company (discontinued operations).
Material Changes vs. Prior Period
- Net Loss in Fiscal 2001: The Company reported a net loss of $48.3 million, a significant decline from the $723.7 million net income in Fiscal 2000. This reversal was driven primarily by the absence of the one-time gain from the Water Products sale in 2000 and substantial unusual charges in 2001.
- Unusual Charges: Fiscal 2001 included $458.3 million in pre-tax unusual charges. Key components included:
- Customer Settlements: A $161.1 million charge in the Health Care Information Technology segment for settlements related to pre-July 1999 software contracts.
- Asset Impairments: Significant write-downs of goodwill and intangibles ($116.2 million) related to the restructuring of the former iMcKesson business unit (including acquisitions of Abaton.com and MediVation).
- Investment Losses: A $105.6 million impairment loss on WebMD warrants and other equity investments.
- Revenue Growth: Total revenues increased 14.5% to $42.0 billion, driven by the Health Care Supply Management segment (up 15%), while the Health Care Information Technology segment revenues declined 9% to $0.9 billion.
- Segment Performance: The Health Care Information Technology segment operating profit collapsed to $0.5 million (down 99% from $82.0 million in 2000) due to revenue recognition changes and restructuring costs.
Guidance, Outlook, Risks, and Contingencies
- Accounting Litigation: As of April 30, 2001, 85 lawsuits have been filed against the Company regarding the restatement of historical financial statements related to the HBOC acquisition. The Company states it is not feasible to predict the outcome or estimate potential losses, which could be material. Investigations by the SEC and U.S. Attorney's Office are ongoing.
- Customer Concentration Risk: Sales to the ten largest customers accounted for 57% of total revenues in Fiscal 2001. The largest customer, Rite Aid Corporation, represented 16% of revenues. Defaults or reduced purchases by these customers could significantly impact financial condition.
- Restructuring Impact: The restructuring of the iMcKesson business unit is expected to reduce future goodwill amortization by approximately $20 million in Fiscal 2002 and reduce product development and payroll expenses, though revenues from discontinued products will be eliminated.
- Regulatory Risks: The Company faces potential regulation by the FDA regarding information technology products as medical devices and evolving HIPAA regulations regarding patient confidentiality, which could impose redesign costs or depress demand.
- Environmental Liabilities: Estimated remediation costs for former chemical operations are approximately $13 million (net of third-party contributions), with an additional $1.5 million estimated for Superfund sites.
Key Facts for Investor Verification
- Restatement Litigation Exposure: Verify the status of the 85 pending lawsuits and the potential financial impact of the accounting restatement related to the HBOC acquisition.
- Customer Concentration: Monitor the financial health and purchasing volume of the top 10 customers, particularly Rite Aid Corporation (16% of revenue).
- IT Segment Viability: Assess the recovery potential of the Health Care Information Technology segment following the 99% drop in operating profit and significant customer settlement charges.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the limitation that total debt not exceed 56.5% of total capitalization.
- Investment Portfolio: Review the valuation and potential further impairment of remaining equity investments, particularly WebMD warrants.